Technology transfer is a key reason Vietnam attempts to attract FDI but results are way short of expectations. Minh Tien reports.
Developing economies around the world are investing substantial resources to attract foreign direct investment (FDI) and enjoy the benefits of capital inflows and job creation. But the ultimate goal is to help them catch up in the technology realm and increase productivity at domestic industries by accessing new technologies and innovations from foreign-invested enterprises (FIEs).
In 1988 the Ordinance on the Transfer of Foreign Technology into Vietnam was passed through the State Council with major expectations of attracting advanced technologies from abroad, especially through FDI, to serve the country’s development. A quarter-century later, with more than 12,000 FDI projects and aggregate investment of $90 billion, progress lags behind requirements for the country’s industrialisation and modernisation process.
The World Economic Forum’s Global Competitiveness Index report for 2013 placed Vietnam in 103rd position out of 144 countries regarding technology transfer within FDI, which was a nine-place fall against 2012. At the “Research on Policy Adjustments in Foreign Direct Investment in Vietnam to 2020” conference last December, Ms Nguyen Tue Anh, Vice President of the Central Institute for Economic Management (CIEM) under the Ministry of Planning and Investment (MPI), acknowledged that technology transfer within the FDI sector was insignificant and occurred mostly between large enterprises in the form of partnership agreements.
FIEs actually hold significant advantages in the use and transfer of modern technologies but transfer has been tardy at best. Summarising 25 years of foreign investment in Vietnam, MPI revealed that a that a modest 5 or 6 per cent of FIEs applied modern technologies in their production in the country, while 80 per cent used average technologies and, most critically, 14 per cent operated with extremely outdated technologies.
Recent reports from the Ministry of Science and Technology (MoST) showed that total technology transfer contract registrations approved or certified from 1999 to June 2012 totalled 838 and the FDI sector accounted for roughly half. CIEMs figure for 2004, however, was 90 per cent.
There a few explanations behind such disappointing progress. On the one hand, 87 per cent of FIEs are wholly-owned and as a self-contained model the segment sees almost no technology transfer. On the other hand, foreign investors in joint ventures always place priority on profit targets and return on investment and consequently will transfer the equipment they find can generate the best result for them, which ends up primarily being average or outdated.
Besides such factors, Mr Nguyen Tu Anh, former Deputy Director of CIEM’s Research Department on Macroeconomic Policies, also pointed to local firms not necessarily possessing the minimum level of skills needed to benefit from technology transfer associated with FDI. His view is shared by the United Nations Conference on Trade and Development (UNCTAD), which has stated that a key determinant of the development impact on a host economy that acquires technologies is its absorptive capacity.
South Korea’s Hyundai recently abandoned its intention to contribute capital to an engine manufacturing project due to sluggishness in implementation by its Vietnam partner as the technology transfer contract expired after a few years. The transfer contract may yet be revised, but Hyundai’s actions should encourage local enterprises to move faster and push authorities to create better conditions for such a process.
Vietnam is learning from Japan, South Korea and China, who lead the way in technology transfer and so have valuable experience and knowledge about the role and impact of foreign investment on the receipt of advanced technologies. Their studies have been made under their own particular circumstances and thus may not fully address another country’s barriers to technology transfer through FDI projects in the context of integration and globalisation. Nevertheless, their case studies remain precious lessons for developing countries like Vietnam to learn and then adapt to secure the best possible results not only in negotiations and obtainment but also in the mastery of advanced technologies.
For many years the United Nations’ Economic and Social Commission for Asia and the Pacific (UN ESCAP) have been recommending how to narrow the technology gap between developed and regional developing countries by making amendments to countries’ FDI attraction processes. Many senior economists believe that the unfavourable situation in technology transfer is a direct result of Vietnam’s somewhat undisciplined FDI attraction efforts. The interaction between FDI and private domestic firms, however, can inform debate on how best to design policies to attract FDI and should be encouraged in the future.
Overall, domestic firms experience more productivity spill-over from joint ventures than from wholly foreign-owned firms. The government should therefore continue to support joint ventures given that there is strong evidence for productivity externalities filtering along the supply chain. There is also a role for wholly foreign-owned projects to actively enhance the productivity of domestic firms. In particular, policies aimed at attracting fully foreign-owned firms should be coupled with conditions for the direct transfer of knowledge between firms and the local sourcing of inputs. UN ESCAP suggests that foreign enterprises may at the moment enjoy preferential policies on land rentals, taxes, workers, etc., that their local counterparts can only dream about, and such incentives should be “traded” for advanced technologies.
Providing support to domestic firms to innovate and adapt to new markets created by the entry of foreign firms has the potential to yield productivity improvements. FDI should and will continue but attention must be paid to providing support to enable domestic firms to innovate and adapt to the new opportunities created by foreign entries.
“FIEs would be willing to transfer their technologies if our local companies can fit into their global production value chains and satisfy their international manufacturing requirements,” said Mr Nguyen Dinh Cung, acting President of CIEM. “Product quality and reliability are crucial for FIEs. Therefore, if local firms fail to enhance their capacity and production levels based on manufacturing methods and the need by foreign investors to have proper preparations, they will scarcely obtain any access to technology transfer or utilise the management schemes of FIEs.”
Masquerading as modern
Last year the Dong Nai Provincial Department of Taxation found that old machinery valued at $400,000 had been imported to Vietnam by the Hualon Corporation (a joint venture from Malaysia, Taiwan and the British Virgin Islands) with a listed price of $16 million and described as a high-tech production line.
Regardless of the complicated financial issues that may lie behind the case, it is probably not the one in Vietnam and the actual situation of technology transfer may not be as good as it appears.